This module summarizes the main points of the traditional decision-making process, discusses the hidden dangers inherent to that process, and presents real-world examples of major decisions that went awfully wrong. Links to external websites providing relevant information are also included.

DEFINITIONS

Let us begin our discussion of decision making by first defining the term decision. Of several dictionary definitions for the noun, two* in particular highlight the nature of decisions as cognitive functions:

1. a judgment, conclusion or determination reached after consideration2. the action or process of resolving an issue; the act of making up one's mind.

The former definition limits itself to the cognitive domain while the latter one adopts a behavioral perspective, stressing the element of activity. Yet implicit in both is the notion of choice: selecting an alternative from among competing possibilities. This leads us to a third, operational definition for decision:

3. the act or process of choosing an option or course of action from a set of alternatives

which is a generally accepted meaning of the word. Jonathan Baron, for one, puts it plainly:

4. "A decision is a choice of action — of what to do or not to do." **

Reid Hastie and Robyn Dawes expand on this view:

5. A decision is a response in a situation that is composed of three parts:

a. there is more than one possible course of action in the choice set

b. the decision maker can form expectations about the outcomes that follow from each course of action

c. the consequences of the outcomes can be assessed relative to current goals and personal values. †

Professor Ronald Howard, one of the founders of decision analysis, takes a different tack. In his class lectures he defines decision as:

These last two definitions address a different yet very important aspect of decision making: resources (money, assets, time, cognitive effort or forgone opportunities) are surely involved and therefore at stake. When choosing, be it a cone at the ice cream shop or a partner for marriage, valuable resources are being irrevocably committed. Which means that, rationally, decisions —and hence, decision making— should never be taken lightly. A modicum of clear-headed thinking should always be expended when making a decision.

From the above paragraph we can infer that a second term in need of clarification is the adjective rational. In common parlance, the word rational means "based on or in accordance with reason" or "logical". In decision-theoretic terminology, however, rational signifies that the decision maker has a definite purpose in making her decision and that her choices are the means of achieving that end. Specifically, rationality implies three things:

A. Aim - the decision maker has a well-defined goal (or objectives)B. Intent - the decision maker (or her agents) fully intends to attain her goalC. Coherence - the decision maker's actions are fully consistent with her aim and intent.

Colloquially, coherence requires that the decision maker not only talk the talk but also walk the walk.

[In this website‡, incidentally, goals are fundamental ends or ultimate results pursued by decision makers. Goals are strategic in nature: achievements demanding considerable effort that are deemed of the utmost importance, especially in the long term. Objectives, on the other hand, are less demanding, more specific results one seeks to achieve in the short term, the time frame often being fixed by a deadline. While objectives tend to be quantified, goals may not always lend themselves to quantification; proxy metrics could then be used to assess attainment. Objectives are sometimes strung together into sequences as a means of working progressively towards complex goals. In general, one can have many objectives, but goals should be kept to a minimum. One must be selective when setting goals if one is serious about accomplishment. That being said, one should keep in mind that it is common practice to also use the words goal and objective as interchangeable synonyms.]

Consequently, a choice definition for decision might well be:

8. Decision - an irrevocable commitment of resources intended to accomplish a goal.

* Edited definitions derived from The American Heritage Dictionary of the English Language, Collins English Dictionary, Compact Oxford English Dictionary, Merriam-Webster's Online Dictionary, New Oxford American Dictionary

‡ Except for the discussion of goal programming within the Linear Programming module, where goal stands for "flexible objective"

APPROACHES TO DECISION MAKING

Individuals tend to exhibit four basic approaches to making decisions, which can be designated as follows:

1. Inactive Approach - the decision maker does nothing of consequence to make a reasoned choice. In effect, the choice is to let the problem resolve itself. This approach —let the chips fall where they may— is rather common in everyday decision making. It cannot, however, be considered rational, for little if any reasoning is actually done. From a strategy viewpoint, it is not rational because the decision maker is forgoing an opportunity to influence a favorable outcome. There may well be perfectly good reasons to avoid influencing the outcome (such as a desire to remain neutral in the resolution of an issue) but still, critical thinking about the content of the decision is lacking.

2. Reactive Approach - the decision maker opts for a course of action by reacting —possibly unawares— to the perceived situation, which may itself be the result of decisions made by other stakeholders of the problem. Again, this approach is quite common in day-to-day decision making. Indeed, most casual decisions are seemingly made by force of habit: acquired patterns of behavior that are often evoked automatically. Choosing reactively (as by intuition) can give the impression of being a proper response mechanism in a given set of circumstances, but beware: reacting to situations without first analyzing the overall state of affairs one confronts can expose the decision maker to grave dangers. It is a risky approach which, as history shows, is routinely exploited by military strategists and chess masters to their advantage. Furthermore, irrespective of the actions of others, intuition is far from infallible. Hunches should always be verified to the extent possible. Reacting to stimuli without thinking things critically is neither a rational nor an advisable approach.

3. Proactive Approach - the decision maker opts for a course of action by first carefully analyzing the problem situation within its relevant context (the environment in which the problem situation is embedded — see System Concepts), then devising and evaluating prospective measures that would serve to attain the intended objectives while complying with all applicable constraints, and only then choosing the most promising alternative. This is the normative approach to decision making — the way decisions should be made. Since it is based on factual analysis and diligent reasoning, the use of available or procurable information, and mindful of both objectives as well as constraints, it is an eminently rational approach.

4. Interactive Approach - the decision maker probes the decision problem by experimenting with tentative courses of action before making the final choice. In effect, the decision problem itself is used as a test bed to explore the desirability of possible alternative solutions. Although there is some rational validity to this approach —it is, after all, experimental in nature— it is laden with flaws. For one, many problems do not admit of multiple solution attempts: once an alternative is tested, that's it; there are no subsequent opportunities to interact with the problem under the original conditions. But even when repeated testing is possible, the costs and/or risks of doing so may be unacceptable. Ethical issues also arise when the testing affects other people. Modeling provides an effective way to proceed in such cases: probing and testing is conducted on a model, leaving the original problem intact until a definitive course of action is finally settled on.

PROACTIVE DECISION MAKING

An intelligent approach to decision making would generally observe the following steps:

1. Recognize and define the problemThis refers to the process of correctly identifying and making explicit the problem or opportunity faced by the decision maker. To do this, one must first become aware that a problem or opportunity does in fact exist before proceeding to state —in writing— the goal and/or objective(s) to be pursued along with the set of constraints that must be complied with. Defining the problem allows the decision maker to pose the pivotal question: What must be done to solve this particular problem? Thus, problem definition focuses the decision maker's attention on possible action alternatives that should, in principle, lead to attainment of the desired results.

2. Gather information about the problemInformation gathering strives to ascertain facts that are relevant to the decision problem. This often reduces to a search for answers to questions raised by the decision maker. In general, typical sources of information include published articles and reports, internal company records, market surveys and business intelligence, opinions of various stakeholders culled by interviews or questionnaires as well as by informal conversations, professional consultations, in-house testing and experimentation, and direct observation by the decision maker of a variety of issues that impinge on the problem at hand.

3. Identify action alternativesCreativity is the key in this phase of the decision process. As the decision maker gathers information, she begins conceiving possible solution alternatives. Traditional decision making draws heavily on subjective criteria based on intuition, experience and personal judgment in order to generate action alternatives. More structured methods can also be used, such as brainstorming, focus groups and quality circles. The emphasis at this point should be on generating possible courses of action, not on criticizing or evaluating the alternatives. The catchphrase here is: Think outside the box (don't be constrained by conventional thinking).

4. Determine the evaluation criteriaIn order to evaluate the action alternatives, the decision maker must first determine the evaluation criteria along with the relative importance of each criterion. Clearly, the criteria and weighting chosen for the evaluation will determine which alternative is selected provided that the process is conducted forthrightly. The decision maker must try to be as objective as possible in determining the composition and weighting of the evaluation criteria so as to guard against personal, organizational and cultural biases that may vitiate the validity of the decision.

5. Evaluate the alternativesThe decision maker compares the pros and cons of each action alternative in accordance with the evaluation criteria. Benefits and costs are estimated, and each alternative's potential for attaining the goal or objectives is assessed. Weak alternatives are winnowed out and a minimal set of preferred options is determined, typically consisting of two or three main contenders.

6. Select the best alternativeThis is the classic decision point: choice. By now, goes the traditional argument, the decision maker ought to be clear on which alternative seems to be the most promising course of action. Consequently, the decision is made, based in large part on personal judgment. However, even in moderately complex problems, the best alternative may not be readily apparent. Or worse, an inferior alternative may seem to be the best due to errors of subjective evaluation. These errors are very difficult to detect because of a dearth of objective elements with which to cross-check subjective judgments. Modeling can be extremely useful in identifying optimal alternatives that fail to be assessed correctly by the unaided mind.

7. Implement the chosen alternativeIn an organizational setting, the decision maker sets in motion a course of action that involves the customary managerial tasks: planning, organizing, leading and controlling. It is at this point that the functional business specialties come into play: production/operations, marketing, sales and service, accounting, finance, and human resource management. Note that just about all of what constitutes the typical business school curriculum comes into play after the decision has been made. If the decision is a poor choice, nothing that follows will be able to remedy the initial error. Determining the right choice is the most important aspect of any decision problem.

8. Evaluate the resultsLearn from both your successes and your mistakes.

There is nothing intrinsically wrong with the conventional decision-making process. By and large, it tends to produce effective results in familiar and stable stable environments. Unfortunately, it also tends to mask serious hazards which can —and not infrequently do— cause major problems, the most salient of which are discussed on the next page.